Reviewing charts available on CNBC.com shows major U.S. stock market indexes declined roughly 20 percent from late September to late December. Looking back at the front end of this correction, much of the buzz in the financial press involved the likelihood of the U.S. sliding into recession in 2019.
The culprit behind this imminently feared recession at the time was the Federal Reserve’s declared intention to raise short term interest rates throughout 2019. Coming out of the summer of 2018, the Fed had begun to use some very resolute language about the need for more rate hikes going forward.
Investors, myself included, looked for language from the Fed that indicated a more data dependent, less pre-determined approach. The Fed began softening its tone in mid-December, the market bottomed, and has since recouped about two-thirds of its losses.
The U.S. economy has continued to post solid performance numbers coming into 2019. Employment numbers are nothing short of remarkable with the Bureau of Labor Statistics posting a 3.9 percent unemployment rate in December 2018, with an amazing 312,000 job created during the reporting period.
Even the dreaded but predicted “earnings recession” doesn’t seem to be materializing. According to FactSet as of last Friday 66% of S&P 500 companies had reported 4th quarter 2018 earnings. Of those reporting 71% beat expectations. Hardly a bad quarter.
So what does this all mean? Is the market in the clear and ready to rally?
Of course, it’s impossible to accurately and consistently predict short term market moves. As usual, we have some noise to consider, a government shutdown, Chinese trade talks, a messy Brexit, but the U.S. economy continues to maintain momentum, which leads us back full circle to last summer and to the Fed.
The Fed did soften its public commentary, taking a more pensive approach toward interest rate hikes. But if what we asked for was more data focused decisions, and the data continues to point toward continued economic growth, then should we expect interest rates to move higher as well?
My answer is probably.
Early on, I actually referred to last fall’s correction as an interest rate tantrum, along the lines of what the U.S. experienced in 2013 and 2015, nothing I’ve seen thus far has moved me from that position. Eventually interest rates will likely need to move higher to address inflation concerns in the U.S.
I believe the primary metric to watch along these lines is wage growth, which after a couple of decades of stagnation has finally begun to move higher, which is a fundamentally good thing for everyone, including investors.
Which also implies that increases in interest rates can also be a fundamentally good sign for our economy. This doesn’t mean that like a toddler being forced to eat their vegetables, traders, speculators and even some twitchy investors won’t throw more tantrums if rate increases do come our way this year, but for investors with an intermediate to long term mindset, taking a balanced approach, investing in high quality American companies, I believe the stock market can be a productive tool in 2019.
This being said, if you didn’t like your December investment statement and don’t want to go through this experience again, the current rally has also provided a nice window to adjust your risk level accordingly.
Opinions are solely the writer's and are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing involves risk, including loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at firstname.lastname@example.org. Securities offered through LPL Financial, member FINRA/SIPC.